Getting a cost-of-living adjustment (COLA) rider with a disability income (DI) policy can certainly add to the price — but it can also lead to a dramatic increase in well-being for a policyholder who ends up filing a claim.
Let’s look at a case involving Jane Doe, Esquire.
Assumptions about Jane:
- 30 years old.
- Annual income: $100,000.
Jane buys a policy that provides $5,000 per month in coverage, with a 90-day wait and benefits paid to age 70. The DI contract is an own occupation, residual/recovery policy, with a catastrophic benefit added.
Jane buys this contract from a quality carrier. It will cost her about $2,500 per year for the next 40 working years, for a total payment of $100,000, give or take a couple hundred dollars either way if she “shops “ the coverage among DI carriers.
Even if she is never disabled, the $100,000 would be well spent on protecting her lifestyle.
If she has a terrible accident or sickness the day after she puts the contract in force, the contract will pay her about $2,385,000 over her lifetime.
Her insurance representative convinces her to add a 3 percent, Consumer Price Index (CPI) inflation rider to the contract.
The scenario is the same as described above, except that adding the rider adds about $350 per year to the cost of the contract, or about $14,000 to the above-mentioned $100,000 in total premium premiums.
If Jane is never disabled, she has lost the use of $114,000 over that period of time, rather than $100,000.
If Jane has a terrible accident or sickness, the CPI rider would kick in. If prices were flat for an extended period, and the CPI held steady, or fell, the monthly benefit would continue to be as high as it would be without the rider. If the prices did what they have done throughout most of our lives and went up, and the CPI increased along with the prices, the contract could pay something close to $3.1 million to $3.2 million in benefits.
Here’s the question: Do you want Jane to make the $14,000 “mistake” or the $600,000 mistake?
It’s pretty obvious.
A COLA rider should be a part of any DI contract for clients ages 55 and younger. Inflation protection does make a difference, especially for clients who will need all of the money they can get to cope with the effects of a terrible accident or sickness.